Having plied his trade in the finance industry for 20 years (during which time he worked for Accenture, Discovery, FNB and Wesbank), Alan Quinn has an intimate understanding of vehicle finance. In this instalment, he walks us through the process of trading in your car for a new one and, specifically, how to avoid falling into the debt trap of borrowing extra money just to get out of (settle) the finance agreement through which you purchased your current vehicle!
So you have decided that you want a new car, well, that’s what Cars.co.za is here for… to help you find the perfect car – for you. We’re also here to help you with your car finance too.
It’s great to dream about getting behind the ‘wheel of a new car, but there are a few things to keep in mind as you progress along your car-buying journey. At Cars.co.za, we are all about connecting sellers with buyers, but we also want to help consumers make wiser financial decisions. This article may help you to consider your next car purchase carefully and, if things fall in place, secure a smart deal.
Most people who buy cars already have ones that they purchased by virtue of securing vehicle finance agreements (usually with banks) a few years ago. While they’re shopping for their “new wheels”, they are most probably still paying off the sums of money that they owe the banks (for those cars) by way of making monthly payments.
Since most vehicle finance agreements last for 6 years, I am guessing that you still have a few years left to go in terms of the payments you need to make. This makes things a little more complicated when you are car-shopping, because you need to think about how you will terminate the existing finance agreement (as well as trading in your car) to get that new or used car that you have your eye on.
Let me give you a shortlist of things to consider and check as you go through this process.
When trading in your car, check your trade-in value
There is a famous saying in the tech industry: “In God we trust; everyone else must bring data”. Right now, if you have not done your homework and looked up data on the value of the trade-in that you can reasonably expect a dealership or trader to offer for your current car, then you are placing WAY too much trust in your friendly vehicle vendor!
It does not matter what price the dealer offers you when trading in your car, you should ALWAYS check. Nowadays, this does not mean that you need to spend a day driving around 10 different dealers to ask them how much they would offer you for your car. Cars.co.za has a service called Match! – it is a free tool to sell your car into South Africa’s largest dealer network. Load your car onto Match! and within 48 hrs you are likely to receive offers from multiple dealers. The data you get will allow you to make sure you are getting the best possible trade-in value for your car in the used-car market.
Know your Settlement Value
Secondly, you need to find out how much you will need to pay to “settle” the existing finance agreement for your current car. Go to your existing finance provider’s website and look for a “settlement quote”. However, don’t just look for the “outstanding balance” on the account as there are often charges applicable to the settlement of the loan, which will be incorporated into said settlement quote.
The charge you need to be most mindful of is “penalty interest”. The National Credit Act allows finance providers to charge penalty interest on “large agreements” if the loan is settled early. What’s a large agreement? Well, it’s where the ORIGINAL finance amount is larger than R250k.
Think back to when you bought your current car. Was the loan larger than R250k? If it was, you WILL be charged “penalty interest”. The only way around this is if you give the bank (or applicable financial institution) 90 days notice that you intend to settle your account. The “penalty” is the interest you would have paid over the next 3 months and this can be as much as R10k for an average agreement.
All of this means that making a phone call to your existing finance provider and waiting for 90 days before you “settle up” could save you a lot of money.
Also Read: How to buy a car if you are blacklisted
Compare Settlement Value to Trade-in Value:
Often the amount owed to the bank, as in the “settlement quote”, is larger than the trade-in valuation of the vehicle. This is VERY COMMON if you have:
- Owned your vehicle for less than 3 years
- Bought your existing vehicle using a balloon payment
- You did not put down a deposit as part of your existing agreement
If this happens to you, this is often a major sticking point to being able to buy a replacement vehicle. When trading in your car, you will need to find extra cash to settle your existing vehicle loan.
The best thing to do here is to be patient and wait. If you keep making payments on your current car, eventually you will have paid up enough of the loan that the trade-in value is higher than the settlement quote. I know this is not great news, but raising a large sum of hard-earned cash just to SELL your car is not the best decision. It’s better to use whatever cash you have left as a deposit to BUY a new car.
Car finance related content
Check the price of the car you want to buy
This is the most obvious tip. Benchmark the asking price of the particular vehicle that you want to buy against similar examples on the market. Can you justifiably ask the dealership to reduce the vehicle’s price to sweeten the deal, or is the price they’re asking quite fair? More than 70 000 vehicles are listed for sale on Cars.co.za, which means you have a wide choice and the ability to compare like for like.
Also read: Should you use a personal loan to buy a car?
Check the fineprint and extra add-ons
Happy with the trade-in and the final price of the new car? When finalising the deal, you will receive a written/printed quote from the sales staff, but be very mindful to check every line of the document.
Don’t be shocked – the dealer WILL charge “on-the-road” fees. To an extent, these are justified. When you buy the car, the dealer needs to transfer the vehicle licence to you via the traffic department and licence it for 12 months. They should also give you a tank of fuel in the car. As a car owner, you already know what these things cost. If he/she is charging for more than that, there is room for negotiation.
Watch out for anything else you are paying for over and above the car. There are many things that you may wish to purchase and add to your finance deal, for example, a warranty or service plan. There are many products such as dent-and-scratch cover, tyre insurance, tracking devices, shortfall protection… the list is endless. Think carefully and consider all of these before you buy.
Dealers sell these items because they get commissions from them. That does not mean that they are bad products, it just means that you should only buy them if you think they are worth YOUR while.
One final piece of advice: I know of no bank that will insist that you add a “credit life” policy, warranty or any other product to your car purchase. If you want to finance the vehicle’s purchase, the banks will only insist that your car is comprehensively insured. Banks don’t care which insurer you choose, which allows you the chance to shop around for the best policy beforehand, which is what you should do.
Buy with confidence
We want you to be happy with your new car and hope that the tips listed above will make sure you don’t have heart palpitations when the first debit order for the new-car purchase comes off your account. This is one of the biggest financial decisions you will make and those debit orders will make sure you feel it for a number of years! Do your homework at every step. It can save you thousands of rands.
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